Oct. 23 (Bloomberg) -- Mexico's Senate agreed to allow state oil company Petroleos Mexicanos to hire private companies to explore and drill for oil, casting its vote as riot police dealt with protesters blocking streets outside.

Lawmakers passed all seven bills based on an initiative proposed by President Felipe Calderon. The lower house of Congress plans to vote on the measures Oct. 28, Emilio Gamboa Patron, leader for the opposition Institutional Revolutionary Party in the chamber, said in a statement.

Calderon has said his proposals would free up funds for exploration to help reverse declining production at the company, known as Pemex, even as lawmakers amended his plan last week by removing a measure to let other companies operate refineries. Under the legislation Pemex would be able to sign service contracts and provide performance-based incentives.

``We're approving the most important energy reform since the oil expropriation,'' said Ruben Camarillo, a member of Calderon's National Action Party and the Senate's energy committee. ``This reform will strengthen Pemex, and give it new and better tools to face the great challenges it has before it.''

Since Pemex was created with the expropriated assets of U.K. and U.S. oil companies in 1938, the government has enforced the clause of the federal constitution that gives the state the exclusive right to process and distribute oil and natural gas. Calderon's measure didn't propose changing that clause.

Blocked Entrances

Senators approved the bills even as they met at an alternate site after supporters of former presidential candidate Andres Manuel Lopez Obrador blocked the entrance to the Senate building to protest the measures. Some lawmakers criticized Lopez Obrador before the vote.

``In a democracy, the majority decides,'' Francisco Labastida, head of the Senate's energy committee, said about the protest. ``When the minority tries to decide and impose its criteria on the majorities, this becomes a dictatorship.''

Thousands of demonstrators gathered outside the alternate site during the vote, shutting down Mexico City's Reforma Avenue in the process.

``I'm here so they don't privatize Pemex,'' said protester Octavio Velasquez, 50. ``The reform is bad for the people.'' Velasquez wore a shirt that read ``Defend national sovereignty.''

Public Security Minister Genaro Garcia Luna, sweaty and with rolled-up sleeves, personally directed a federal police operation at the alternate site to prevent opposition lawmakers from disrupting the vote, newspaper El Universal reported on its Web site.

Foreigners, Elite

Opponents led by Lopez Obrador, who lost the 2006 presidential election to Calderon by less than a percentage point, say the energy initiative would transfer Mexico's oil wealth to foreigners and the business elite, and that cutting Pemex taxes is a better option.

``Like it or not, we have to recognize the unquestionable leadership of Lopez Obrador,'' said Dante Delgado, senator for the opposition Convergencia party, which is allied with the former presidential candidate. ``The social forces he organized are the most important in the history of this country.''

Even so, the majority of senators from Lopez Obrador's Party of the Democratic Revolution voted in favor of the bills today.

``Lopez Obrador has overplayed his hand,'' said George W. Grayson, Professor of government at the College of William and Mary in Williamsburg, Virginia. ``His goal is chaos.''

The lower house of Congress passed a measure today to allow its leaders to designate an alternative site to put the energy measures to a vote in case of protests.

Falling Output

The resistance by Lopez Obrador doesn't signal the initiative is substantial enough to interest major oil and gas countries to seek contracts with Pemex, and it's unlikely to reverse falling oil output, said Jeremy Martin, director of the energy program at the Institute of the Americas in La Jolla, California.

Under the changes, while companies that sign contracts for exploration and production would be able to receive performance- based incentives, they won't be allowed to own Mexican oil or book reserves. The measures also don't change current laws that prohibit private companies from refining oil.

Still, the initiative is a step in the right direction for the state oil monopoly, and is evidence that Calderon is able to pass controversial legislation that his predecessors were unable to muster, Martin said.

``You must learn to crawl before you can walk,'' Martin said in an e-mail. ``It is an important incremental step that will at least offer some needed tweaks at Pemex.''

Pemex's monthly crude output fell to 2.722 million barrels a day in September, a decline of 14 percent from a year ago and the lowest since November 1995, on decreased demand from U.S. refiners and as its largest field declined.

To contact the reporter on this story: Jens Erik Gould in Mexico City at jgould9@bloomberg.net; Adriana Lopez Caraveo in Mexico City at adrianalopez@bloomberg.net;

Last Updated: October 23, 2008 19:12 EDT